inventory cont

8/3/2019 Inventory Cont.

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Inventory control

Techniques :


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What Is Inventory?

Stock of items kept to meet future

demand Purpose of inventory management

how many units to order

when to order


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Types of Inventory

Raw materials inventory

M.R.O/ spare parts inventory

Work-in-process (partially completed)

Finished goods inventory


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TECHNIQUES OFINVENTORY CONTROL:

12-4


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ABC analysis:

A very close control is exercised over the

items of A group which account for ahigh percentage of costs while lessstringent control is adequate for categoryB and very little control would suffice for

category C items.

Copyright 2006 John Wiley & Sons, Inc. 12-5


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Always Better Control (ABC)

Analysis This technique divides inventory into three categories

A, B & C based on their annual consumption value.

It is also known as Selective Inventory Control Method(SIM)

This method is a means of categorizing inventory

items according to the potential amount to becontrolled.

ABC analysis has universal application for fieldsrequiring selective control.


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Procedure for ABC Analysis

Make the list of all items of inventory. Determine the annual volume of usage & money value of

each item. Multiply each items annual volume by its rupee value. Compute each items percentage of the total inventory in

terms of annual usage in rupees. Select the top 10% of all items which have the highest

rupee percentages & classify them as A items.

Select the next 20% of all items with the next highest rupeepercentages & designate them B items.

The next 70% of all items with the lowest rupeepercentages are C items.


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ABC Classification

Class A

5 15 % of units

70 80 % of value

Class B 30 % of units

15 % of value

Class C 50 60 % of units

5 10 % of value


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EXAMPLES:

A= diamond,bmwB= activa, bikes

C= sugar, tea bags etc

Copyright 2006 John Wiley & Sons, Inc. 12-9


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Advantages of ABC Analysis

Helps to exercise selective control Gives rewarding results quickly Helps to point out obsolete stocks easily. In case of A items careful attention can be paid at every

step such as estimate of requirements, purchase, safetystock, receipts, inspections, issues, etc. & close control ismaintained.

In case of C items, recording & follow up, etc. may be

dispensed with or combined. Helps better planning of inventory control Provides sound basis for allocation of funds & human

resources.


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Disadvantages of ABC

Analysis Proper standardization & codification of

inventory items needed.

Considers only money value of items & neglectsthe importance of items for the productionprocess or assembly or functioning.

Periodic review becomes difficult if only ABCanalysis is recalled.

When other important factors make it obligatoryto concentrate on C items more, the purpose ofABC analysis is defeated.


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Economic Order Quantity

(EOQ) Models

EOQ

optimal order quantity that willminimize total inventory costs

Basic EOQ model


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Assumptions of Basic

EOQ Model

Demand is known with certainty and

is constant over time No shortages are allowed

Lead time for the receipt of orders isconstant

Order quantity is received all at once


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Inventory Order Cycle

Demandrate

TimeLeadtime

Leadtime

Orderplaced

Orderplaced

Orderreceipt

Orderreceipt

Inventory

Level

Reorder point, R

Order quantity, Q

0


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EOQ Cost Model

D =DEMAND

Proving equality ofcosts at optimal point

=carrying cost

EOQ =2CoD

Cc

Cc

Co =ordering cost


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EOQ Cost Model (cont.)

Order Quantity, Q

Annualcost ($) Total Cost

Carrying Cost =

CcQ

2

Slope = 0

Minimumtotal cost

Optimal orderQopt

Ordering Cost =C

oD

Q


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Economic Order Quantity

(EOQ) EOQ or Fixed Order Quantity system is the technique

of ordering materials whenever stock reaches the

reorder point. Economic order quality deals when the cost of

procurement and handling of inventory are at optimumlevel and total cost is minimum.

In this technique, the order quantity is larger than asingle periods ne requirement so that ordering costs &

holding costs balance out.


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Assumptions of EOQ

Demand for the product is constant

Lead time is constant

Price per unit is constant

Inventory carrying cost is based on

average inventory Ordering costs are constant per order

All demands for the product will be

satisfied (no back orders)


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Weaknesses of EOQ formula

Erratic usages

Faulty basic information

Costly calculations

No formula is substitute for

commonsense EOQ ordering must be tempered with

judgment


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Basic Fixed Order Quantity

Model (EOQ)Annual

Holding

Cost

Total Annual Cost =Annual

Purchase

Cost

Annual

Ordering

Cost

+ +

SQ

DH

QDCTC

2

H

DSEOQ

2

TC = Total annual cost

D = Demand

C = Cost per unit

Q = Order quantity

S = Cost of placing order/setup cost

H = Annual holding and storage cost

per unit of inventory


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Reorder Point

Level of inventory at which a new orderis placed

R= dL

where

d= demand rate per periodL = lead time


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Reorder Point: Example

Demand = 10,000 yards/year

Store open 311 days/yearDaily demand = 10,000 / 311 = 32.154yards/day

Lead time = L = 10 days

R = dL = (32.154)(10) = 321.54 yards


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Variable Demand with

a Reorder Point

Reorderpoint, R

Q

LT

Time

LT

Inventory

level

0


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Reorder Point witha Safety Stock

Reorderpoint, R

Q

LT

Time

LT

Inventory

level

0

Safety Stock


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Important Terms

Minimum Level It is the minimum stockto be maintained for smooth production.

Maximum Level It is the level of stock,beyond which a firm should not maintainthe stock.

Reorder Level The stock level at whichan order should be placed.

Safety Stock Stock for usage at normalrate durin the extension of lead time.


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